Interest rate commentary for 04 December – 08 December 2017
The U.S. Fed is set to raise its target range of the federal funds rate from 1.00% – 1.25% to 1.25% – 1.50% within a week. The new Fed chief, Jerome Powell said recently “the conditions are supportive of doing that” . Cash market futures contract prices have a rate rise fully factored in. The only surprise would be if the Fed’s Open Market Committee (FOMC) did not do it.
Bond yields moved up a basis point or two in most advanced-economy markets, including here in Australia. The U.K market proved to be an exception and 10 year yields rose a few basis point more while Italy’s sovereign 10 year bonds once again proved their negatively-correlated “status” (yields fell there). Despite full employment in the U.S. inflation is nowhere in sight…yet. Perhaps this is the reason behind low bond yields. Markets don’t appear to be convinced economic growth will eventually lead to inflation and slimmer (or negative) real yields. However, as short term rates rise, long term rates will be less appealing, all other things being equal. At what point does “less appealing” start having a noticeable effect?
CHART OF THE WEEK
The only thing which would be a surprise is if the Fed did not raise its federal funds target.
|90day Bank Bill%||1.76||0.01||1.76||1.75|
|Aust 3y Bond%*||1.97||0.02||2.04||1.90|
|Aust 10y Bond%*||2.56||0.01||2.63||2.48|
|Aust 20y Bond%*||3.04||0.00||3.06||2.98|
|US 2y Bond%||1.79||0.01||1.83||1.79|
|US 10y Bond%||2.37||0.01||2.37||2.34|
|US 30y Bond%||2.77||0.01||2.77||2.73|
|* Implied yields from Mar 2017 futures|
Very little changed in local cash markets, except for the timing of the next official interest rate change (rise). Traders have increasingly taken the view rate rises in Australia are less and less a sure thing. In fact, in any month for the next eighteen months, traders think there is some doubt about a rate rise. Not long ago, a rate rise was viewed as a certainty by August 2018. It only goes to show how expectations can change dramatically.
Recent weeks have had very few rate changes among term deposits in the YieldReport survey. This week there were a couple of rate changes by two major banks. One of these banks (which bank?) has been raising and lowering one of its term deposit rates by as much as 65bps. There were also a few rate changes by one small approved deposit-taking institution (ADI). Readers can find these rate changes and any number of useful facts and pieces of information in our term deposit rate page.
Semi-government spreads were a little tighter again and so were corporate spreads. There were another several asset-backed securities transactions in the primary markets (as well as the odd muttering about how many there have been this year).
The median trading margin of ASX-listed hybrids was marginally lower while the median trading margin of ASX-listed notes jumped up. By the way, the general rule for investors is to not pay a much for a security which has just “dropped” its interest or dividend or distribution once it has reached or gone past it ex date. It appears as if some buyers in one hybrid security may not have been aware they were buying an asset which was not going to pay them the next distribution.
For those readers interested in instant diversification of assets, the cash and bond segment of the ETF sector offers a tradable alternative to unlisted funds.
We hope you enjoy reading this week’s YieldReport.
November 2017 monthly interest rate commentary
Bond yields barely moved in most major bond markets around the world with the exception of Australia and the U.K. where yields fell modestly in each market. While there was no particular piece of data to drive local yields lower, the U.K lost 3bps on the day their third quarter GDP figures were updated, even though the figures were not exactly revelatory.
Over the week Australian 3 year bond yields fell 2bps to 1.93% while the 10 year yield fell 7bps to 2.52% and the 20 year bond yield lost 9bps to 3.00%. Normally the local market is heavily influenced by U.S. movements but on this occasion U.S. yields moved very little. Australian yields started off the week following .…Click here to read more
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